VDIGX, DODFX, and FPACX are highly-rated mutual funds for IRAs
Fact checked by Vikki VelasquezReviewed by Margaret James
Many investment options exist for a Roth IRA, a tax-advantaged individual retirement account. Most investors saving for retirement and looking to build a long-term, buy-and-hold portfolio may choose a mix of stocks and bonds.
The precise mix of stocks and bonds depends on two primary factors: how far the investor is from retirement and how risk-averse they are. The further an investor is from retirement, the more volatility they tolerate, and hold more stocks in their portfolio. Investors with a low-risk tolerance may not be able to handle swings in the value of their portfolio and decide bonds will be a large proportion of their portfolio.
Key Takeaways
- Multiple investment options exist for a Roth IRA, a tax-advantaged individual retirement account.
- Morningstar assigns ratings to mutual funds to help guide investors.
- For tax year 2023, IRA Contribution Limits to a Roth IRA are $6,500 under age 50 or $7,500 aged 50 and over.
Investing Strategies
Traditional investing wisdom has claimed that a 60/40 portfolio—60% stocks and 40% bonds—will satisfy the needs of most investors and that the proportion of stocks relative to bonds should shrink as the investor ages. Another traditional yardstick for investors has been “100 minus your age” relative to stock investment. A 30-year-old, for example, should hold 70% stocks and 30% bonds.
Some financial advisors recommend that holding a higher percentage of stocks throughout an investor’s career can greatly enhance potential returns while only marginally increasing the risks. In 2023, model portfolios were utilized given an inflationary unstable economic climate. Model portfolios add exposure to more asset classes including commodities, foreign currencies, real estate, quant strategies, and alternative investments.
Choosing Funds
Three mutual funds for Roth IRAs carry a Morningstar Gold rating in 2023. IRA Contribution Limits, whether Roth or Traditional, are $6,500 under age 50 or $7,500 for ages 50 and over in 2023. For tax year 2024, the IRA contribution limit increases to $7,000 for those under 50 and $8,000 for those 50 and older. Roth IRA contribution limit and the eligibility to contribute depends on an individual’s income level.
Vanguard Dividend Growth Fund (VDIGX)
As of Dec. 5, 2023, VDIGX holds 42 stocks across several sectors including Health Care, Technology, and Consumer Staples. The fund focuses on top companies such as Microsoft and Northrup Grumman Corp. that can grow their dividends over time. One of the fund’s risks is that returns from dividend-paying stocks may trail returns from the overall stock market during any given period.
- Expense Ratio: 0.30%
- Minimum Investment: $3,000
- NAV: $48.74 billion
- 5y Average Return: 11.47%
- Inception Date: May 15, 1992
Dodge & Cox International Stock Fund (DODFX)
DODFX holds a portfolio of equity securities issued by medium-to-large, non-U.S. companies that have a favorable outlook for long-term growth according to Morningstar. As of Dec. 5, 2023, the fund’s holdings of 69 companies include Sanofi and Novartis.
- Expense Ratio: 0.62%
- Minimum Investment: $1,000 (For IRA)
- NAV: $44.7 billion
- 5y Average Return: 6.56%
- Inception Date: May 1, 2001
FPA Crescent Fund (FPACX)
As of Dec. 5, 2023, FPACX holdings include a mix of bonds, stocks, and cash equivalents. Its portfolio holds U.S. Government bonds as well as shares of Comcast and Alphabet. According to the fund objective, FPACX hopes to generate equity-like returns over the long term by incurring less risk than the market.
- Expense Ratio: 1.09%
- Minimum Investment: $1,500
- NAV: $9.21 billion
- 5y Average Return: 9.33%
- Inception Date: Mar. 1, 1996
How Can Investors Diversify Their Retirement Portfolio?
Consistent with modern portfolio theory, risk-averse investors will find that including investments in an equity fund, a bond fund, and an international stock index fund provides a degree of diversification.
Can Investors Choose ETFs or Index Funds for an IRA?
Investors can choose exchange-traded funds (ETFs) or index-focused ETFs for IRA investment. Index funds mimic the performance of an index by passively investing in the securities included in the index.
Can Savers Have Multiple Roth IRAs?
Yes. There is no limit to the number of Roth IRAs that an individual can have. However, increasing the number of Roth IRAs does not increase the amount that one can contribute each year.
The Bottom Line
Most investors saving for retirement through a Roth IRA will want some combination of stocks and bonds. This combination can be achieved by investing in a broad stock index fund, a broad bond fund, and perhaps an international stock fund.
Read the original article on Investopedia.